blockchain is eating software, the internet, data and the world.

​and it's hungry for seconds.

​If a cryptocurrency or altcoin is a security, it must be offered to US investors in an offering registered with the Securities and Exchange Commission ("SEC") or fit into an exemption.

Registration can cost anywhere from hundreds of thousands of dollars to well over a million, and requires that you disclose a lot of information you may not want public. So finding an exemption is usually the preferred route.

Right now, the main exemptions for securities offered in the US are: Reg D, Reg A+ and Reg CF. There is also Reg S for foreign securities offerings, and you’ll read about that in a separate post.

Preemption & Disclosure

Two quick notes before you learn about the exemptions:

State Preemption - Some SEC exemptions “preempt” state securities laws. This means that if your cryptoasset offering is exempt under federal SEC regulations, that exemption “preempts” any state regulation, and you don’t need to consider state security laws.

Preemption is important because, for example, if you have investors in several states, and you use an exemption that does not preempt state law, you will have to separately comply with the securities laws of every state in which an investor lives, and possibly with every state in which a potential investor lives.

Disclosure – Required disclosures are generally not a good thing for an issuer because: (i) they open your kimono to the SEC and/or public, (ii) they create additional opportunities for SEC action (for example, the SEC can take action against an issuer if anything in a disclosure is perceived as misleading), and (iii) they can add significant fees to the cost of the exemption.

Private Offerings

Private offerings are the most common security exemption. The key feature that makes private offerings “private” is that you can’t “generally solicit” your offering, meaning you can’t publicly market it.

There is a broad “private offering” exemption via Section 4(a)(2) of the Securities Act of 1933. But Section 4(a)(2) is open-ended and determined on a case-by-case basis, so most private offerings are done through Regulation D ("Reg D").

The upside of this attention is that you should want the Bitconnects of the world gutted by regulators.

The downside is blockchain-based businesses need to start treating their native cryptoassets as securities. Even tokens created pursuant to a SAFT aren’t likely safe based on recent SEC stances and statements.

As a result, you will likely see digital asset issuers increasingly relying on securities law exemptions.

One option is for ICOs that wish to be compliant is to qualify as an exempt securities offering under Regulation Crowdfunding (“Reg CF”). Indeed, some ICOs, like Indeco, have already used this option since late 2017.

Reg AT is aimed at reducing market disruptions from automated trading. The best example is probably the May 6, 2010 “Flash Crash” when automated trading caused the S&P 500, Dow Jones and Nasdaq to crash and rebound almost 10% in 36 minutes (...tame compared to crypto, I know).

If implemented, Reg AT could require pre-trad risk controls by:

Anyone trading with AT systems;

Certain futures commission merchants (aka, a futures broker); and

“Designated contract markets” (“DCMs”) that execute the orders of anyone trading with AT systems.

The rule would also impose registration requirements on traders that electronically submit orders directly to a DCM, without routing them through a member of a derivatives (aka, futures) clearing organization.

In legal context, "chilling" refers to the fact that too much regulation may slow or kill the development of innovation. E.g., regulation of crowdfunding is considered to have been implemented too quickly, stagnating the development of crowdfunding.

Given Chairman Giancarlo’s favorable treatment of crypto, it’s not surprising he’s hesitant to clamp down before the CFTC has more time to watch the development of relatively new technology develop.

Automated trading is valuable in and of itself, but all the algorithms, code and lessons learned in its development could transfer to other fields. It’s possible that a trading algorithm can pick up certain patterns that may surface in diseases, for example.

Going Forward

In early 2017, the CFTC extended the time period in which it was accepting comments on the proposed Reg AT to May 1, 2017. That day has come to pass, and no public developments have happened with Reg AT.

Given that the Trump administration is keen on less regulation, and Chairman Giancarlo’s is hesitant to regulate new tech too quickly, we may not see any form of the proposed Reg AT implemented at all.

It’s safe to say automated trading isn’t going anywhere. Eventually, regulations will need to be imposed to protect against flash crashes and fraud. But it doesn’t look like that will be happening any time soon.

In everyday terms, commodities are raw materials or products. They are goods that are typically transformed into more consumable products or uses. Common examples are steel, coffee beans or pork bellies.

In the pork bellies context, Eddie Murphy gives some deep insight in Trading Places on how commodities investing works.

The Arizona Senate has passed a bill that would allow state residents to pay their taxes in cryptocurrency

Senate Bill 1091 still needs to pass in Arizona’s House of Representatives, but the fact a bill like this has passed in the Senate is unprecedented in the US. Under the bill, the Arizona Department of Revenue would convert the crypto tax payments into US dollars within 24 hours.

Fiat & Taxes

Ok, great, so Arizona is open to experimenting with crypto. So what? Why does it matter, especially if Arizona would just immediately convert the crypto to dollars?

Because there are convincing arguments that what makes fiat money valuable as “fiat” is the fact it’s the only currency the government you live under will accept for tax payments.

Right now most ICOs are for currencies or utility tokens. But there’s a third category that many believe will be more widespread and useful: security tokens.

What Is A Security Token?

A "security token" is a blockchain-based asset that functions like a traditional security. Instead of owning stock in a company, you would own a security token. That token would come with voting rights, distribution rights, and/or liquidation rights.

Security tokens are a way to bring blockchain efficiencies to traditional equity. Companies can issue tokens instead of stock, and have an up-to-date blockchain ledger of its shareholders at all times.

​Generally, a money transmitter is an entity that provides money transfer or payment services. Common examples include PayPal, Western Union and Barclays.

Federal Money Transmitter Laws

The Bank Secrecy Actand its related regulations impose anti-money laundering (“AML”) regulations on money service businesses (“MSBs”), which include money transmitters. If FinCEN determines an entity is a money transmitter, theconsequencesare that you must:

Register with FinCEN;

Have a money laundering risk assessment completed;

Adopt written AML policies;

Have a qualified compliance officer with adequate funding for your given risk level;

Train employees to implement your policies;

Have regular, independent testing and review of your compliance program;

File extensive reports with FinCEN about customer information and transaction data; and

On March 18, 2013, FinCENpublishedguidance that it would not distinguish between fiat currency and digital currencies for money transmission law purposes. On January 30, 2014, FinCENpublishedadditional guidance.

Generally, whether a person or entity handling crypto counts as a money transmitter depends what the cryptocurrency is used for, and for whose benefit. It does not depend on how it is obtained or how it labels itself.

Exchanger – An exchanger exchanges crypto for fiat, crypto, or other assets.

Administrator – An administrator has authority to issue or withdraw crypto from circulation.

User – A user obtains crypto for their own use and benefit.

Based on FinCEN’s releases, activities must involve either “acceptance” or “transmission” of crypto to trigger the regulations:

The following constitute money transmission:

Businesses that accept crypto from one person and send it to another qualify as money transmitters.

Payment processors that accept crypto from a business’s customers and send fiat to the business are usually money transmitters.

A business that exchanges fiat for crypto.

The following do NOT constitute money transmission:

If someone mines crypto for their own purpose and benefit, they are not an MSB. This includes if it used to buy goods and services, pay debts, or make distributions to the business owners.

However, if a person or business mines crypto and transfers it to third parties at the direction of sellers, creditors, owners, or counterparties involved in the transactions described above, it could constitute money transmission.

Persons and businesses that exchange cryptocurrencies for goods and services are not money transmitters.

State Money Transmitter Laws

Under state laws, a money transmitter must apply for a license. At the federal level, if you meet the above requirements, you can register with FinCEN. That is to say, FinCEN doesn’t exercise discretion over whether you get a license. But at the state level, even if you meet all of a state’s requirements, the state has discretion to deny your license. In other words, state money transmitter licenses are more difficult to obtain and less guaranteed.

Importantly, state money transmission laws can apply to businesses that have no physical presence in the state if that business solicits or services any state citizens.

Many states have issued guidance. The below is a general summary as of August 2018. Please note that each state’s laws may have unique definitions of crypto or other nuances, and thus should be analyzed individually.

In 2016, the state required that Bitcoin businesses must have significant reserves.

Two proposed bills, SB 2853 and SB 3082, would reclassify crypto businesses as money transmitters and require exchanges to get licenses.

Illinois – In June 2017, Illinois stated that persons or businesses engaged in the transmission of only crypto are not money transmitters.

Kansas – On June 6, 2014, Kansas published guidance that persons or businesses engaged solely in the transmission of crypto are not money transmitters.

North Carolina – In June 2016and July 2017, North Carolina enacted HB289 and HB229, respectively, that subject persons and businesses engaged in crypto transmission to the state’s money transmitter laws.

Oklahoma – Oklahoma supplemented a statute to state that a Bitcoin recipient does not have the same protections a money transmitter is entitled to.

Oregon – In May 2015, Oregon required that exchanges are licensed as money transmitters.

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